What’s the first thing you look at when you are trading in equity shares? If you’re like most traders, you simply look at the share price and make a quick decision about buying, selling or holding the stock. However, when it comes to options trading, the options price alone is never the only metric you need to consider.
Analysing the options chain is the crucial first step to finding and implementing profitable options trading strategies. Not sure what the options chain is and what it tells you? In this article, we’ll cover these essential details and also explore advanced options trading tools that can complement the elemental information included in the NSE options chain.
What is an Options Chain?
An options chain is a comprehensive list of all the option contracts of a particular security or underlying asset that is currently available in the market for trading. It is also known as an options matrix. Before you plan your trade and build a profitable options trading strategy, you need to look into the options chain and factor in the data it offers.
A standard options matrix like the NSE options chain has the following components:
● The Type of Options:
An options chain or matrix is divided into two sections, one each for the type of option contracts — namely, call options or put options. A call option gives the holder the right to purchase the underlying asset before the expiry of a certain period at a specified price. A put option, however, offers the holder the right to transfer or sell the underlying asset at a fixed price within a defined timeframe.
Why this is important: Knowing this data helps you decide your market position — where you may buy calls if you expect the asset’s price to rise, or buy puts if you expect it to fall.
● Strike Prices:
The strike price of an options contract is the price at which the holder can exercise their option by expiry. If you hold a call option, the strike price is the price at which you can buy the underlying asset by expiry. On the other hand, if you hold a put option, it is the price at which you can sell the underlying asset by expiry. The strike price is shown as the central element in an options matrix — and divides the chain into two sections for call and put options.
Why this is important: You need to look at the strike price to assess the price level at which you can enter or exit the market profitably.
● Bid and Ask Quantity:
The bid quantity represents the number of contracts that traders are willing to purchase (or bid for) and the ask quantity reflects the number of contracts that traders are willing to sell (or ask). This information is provided for both the call and put options sections for contracts with different strike prices. It essentially reflects the demand and supply in the options market for each contract.
Why this is important: This information is crucial for options traders as it provides insight into the depth of market interest and liquidity for specific options.
● Bid and Ask Prices:
These are the prices at which buyers and sellers are willing to trade the options contract. The bid price is the highest price that an interested buyer is willing to pay for an option, while the ask price is the lowest price that an options seller is willing to accept. The difference between the bid and ask prices is known as the bid-ask spread. Depending on the demand and supply, the spread may be narrow or wide.
Why this is important: These prices are essential to understand the current market demand and supply for the option, so you can execute trades at the most advantageous prices.
● Last Traded Price (LTP):
The Last Traded Price (LTP) is the price at which the most recent transaction for an option contract was executed in the market. It serves as an indicator of what buyers are willing to pay and what sellers are willing to accept at any given point.
Why this is important: The LTP provides a real-time benchmark for the current market value of an option, which is crucial for immediate trading decisions.
● Implied Volatility (IV):
The implied volatility (IV) could give you information on how much or how little the market thinks the price of the underlying asset to change or move before the expiry of an options contract. The IV directly impacts the premium or price of an option. A higher IV generally leads to higher options premiums because the increased volatility also increases the likelihood of the options contract trading in-the-money.
Why this is important: The IV helps you understand market sentiment and the expected range of fluctuations in the underlying asset’s price.
● Trading Volume:
The trading volume is also included in an options chain. It represents the total number of option contracts at each strike price traded within a specified period. It essentially tells you the activity level of an option and indicates how many times contracts have changed hands. By looking at this metric, you can get a clear idea of the market interest and activity for any given options contract.
Why this is important: High trading volumes suggest strong interest and active trading, making it easier for you to enter or exit positions without affecting the option’s price too much.
● Open Interest (OI):
The open interest represents the total number of active option contracts that remain open or unsettled in the market. It increases when new contracts are opened and decreases when contracts are closed. So, the open interest essentially provides insights into the flow of money into the options market and reflects how strong or weak the current price trend may be.
Why this is important: You can use this data to gauge the market sentiment and anticipate potential market movements.
● Change in OI:
This figure represents the day-to-day change in open interest and tells you whether more contracts are being created or closed. An increase in open interest signifies that new money is coming into the market — suggesting a strengthening trend. However, a decrease can indicate waning interest.
Why this is important: This change can help you assess the flow of market sentiment and track potential shifts in price direction.
The NSE Options Chain: A Common Starting Point for F&O Traders
Most beginners to options trading rely on the NSE options chain. This is understandable because the NSE acts as a gateway for most beginners who are new to the derivatives market. Data from the stock exchange backs this up, with the daily options trading volume on the NSE having crossed the ₹150 lakh crore mark way back in 2022. More recent data reveals that options trading accounts for around 75% of the NSE’s revenue.
However, while the NSE options chain does offer all the standard details outlined above, traders also need to look into other advanced metrics to curate profitable options trading strategies.
Beyond the NSE Options Chain: Introducing Options Greeks
The NSE options chain primarily lacks information about options Greeks, which are crucial metrics for options traders. Check out what the options Greeks are, what they tell you and why you need them to build profitable options trading strategies.
● Delta
The options delta is important for understanding how much an option’s price might change with the underlying asset’s price movement. This helps you predict potential profits or losses and make informed decisions about which options to trade.
● Gamma
The gamma measures the rate of change in the delta. By factoring in the gamma, you can better understand how sensitive an option is to movements in the price of the underlying asset. This is crucial for managing risk in fast-moving markets.
● Theta
The theta is important because it gives you a better idea of how an option’s price decreases over time due to time decay. You can use the theta to time your trades and execute strategies that benefit from the passage of time like calendar spreads.
● Vega
The vega measures how much an options contract is affected by changes in the implied volatility of the underlying asset. This helps you assess how an option’s price could change with shifts in market volatility and makes strategy selection and risk management easier.
Why You Need an Advanced Options Chain
An advanced options chain that offers insights beyond the standard NSE options chain can make it easier for you to build profitable options trading strategies.
Having an advanced options chain with Greeks integrated into it is essential for faster and more effective decision-making. The Greeks provide critical insights into how different factors like price movements, time decay and volatility affect the options’ values. By seeing these data points directly in the options chain, you can quickly assess the potential risks and rewards of various strategies without needing to switch between different tools or screens.
Moreover, an advanced options chain allows for a more streamlined trading process. If the option to trade directly from the options chain is not available, you may face delays as you switch between analysis and execution platforms. This can lead to missed opportunities, especially in fast-moving markets where prices can change rapidly.
Find Profitable Options Trading Strategies with Samco Securities
If you are looking for an easy yet effective way to elevate your strategy-building capacity with an advanced options chain, has the answer. The technology-driven brokerage partner offers a comprehensive and advanced options chain that goes beyond the standard NSE options chain and includes live options Greeks data.
To access this advanced options chain from Samco Securities for free, all you need to do is sign up for the Samco demat and trading account and log into the . What’s more, you can also access the pioneering options strategy builder Options BRO from Samco Securities and a whole range of other analytical tools totally free of charge!
